Finance Course Test with Answers

Topics: Time value of money, Future value, Money Pages: 5 (1277 words) Published: June 20, 2013
Question 1
(5 points) $100 today is worth the SAME as $100 tomorrow.
Your AnswerScoreExplanation
FalseCorrect5.00Correct. You understand time value
Total5.00 / 5.00
Question Explanation

We have assumed that time value of money is positive.
Question 2
(5 points) $100 invested for 10 years at 12% interest is worth more in FV terms than $200 invested for 10 years at 4% interest. Your AnswerScoreExplanation
TrueCorrect5.00Correct. You know the mechanics for calculating FV. False
Total5.00 / 5.00
Question Explanation

All about compounding.
Question 3
(5 points) Megan wants to buy a designer handbag and plans to earn the money babysitting. Suppose the interest rate is 6% and she is willing to wait one year to purchase the bag. How much babysitting money (to the nearest whole dollar) will she need to earn today to buy the bag for $400 one year from now? (Enter just the number without the $ sign or a comma) Answer for Question 3

You entered:

Your AnswerScoreExplanation
Total0.00 / 5.00
Question Explanation

Simple PV calculation.
Question 4
(10 points) Johnny and Darren both earn $100 working on their respective neighbors' big farms. Johnny puts his $100 in the piggy bank that his parents gave him to encourage him to save. Darren puts his money in a savings account his parents set up for him. The savings account pays 3% interest. They both take their money out after 5 years. How much more money does Darren have than Johnny? Your AnswerScoreExplanation

16Correct10.00Correct. You know how to calculate FV and intuitively know that the interest has to be only slightly more than $15 because the interest rate is low. Total10.00 / 10.00
Question Explanation

A simple future value calculation. You should see that Darren will earn at least $15 even without compounding. Question 5
(10 points) Your dad invested $25 for you in 1942 in a fund and you have not withdrawn any money since.If the fund has averaged a return of 8 percent over the last 70 years, what is the current value of that investment? (Round to the nearest whole dollar; enter just the number without the $ sign or a comma) Answer for Question 5

You entered:

Your AnswerScoreExplanation
5465Correct10.00Correct. You know how to accurately calculate FV. Total10.00 / 10.00
Question Explanation

Simple FV calculation. The amount has to be at least $165 even if you ignore compounding because so many years have passed. Question 6
(10 points) Bridgette’s grandparents opened a savings account for her and placed $500 in the account. The account pays 3.5% interest. Bridgette wants to be a singer and she has her heart set on a new karaoke machine. The machine costs $150. How much less will the account be worth in 8 years if she buys the karaoke machine now versus leaving the account untouched? (Enter just the number without the $ sign or a comma; round to the nearest whole dollar.) Answer for Question 6

You entered:

Your AnswerScoreExplanation
198Correct10.00Correct. You know that it has to be more than $150, and actually by at least $42. Total10.00 / 10.00
Question Explanation

Again a simple FV calculation, but need to read the question carefully to save time and calculate it only once. Question 7
(10 points) The Johnson family is worried about their ability to pay college tuition for their daughter Chloe. Tuition rates are currently $9,500 per year at the state college and have been increasing at a rate of 7% annually. Chloe will begin college in 7 years. The Johnson’s have $9,500 set aside now in a college plan that will earn 6% per year. They recently heard about a plan to pre-pay tuition at current rates, that is pay $9,500 per year of college. Should they pre-pay Chloe’s first year now or keep the money invested and pay the tuition 7 years from now? How much are they saving in FV terms with this decision? Your AnswerScore...
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